LNG Exports Threaten High Gas Prices in the US as Shale Production Slows

We have written before about the benefits the shale gas revolution is bringing to the US economy (particularly US manufacturing).

Also, we’ve looked at the potential threat that this competitive advantage could be jeopardized by widespread exports of that same low-priced natural gas, depleting the very excess that has caused prices to plunge below world levels.

Cold winter weather has already stimulated a sharp natural gas prices rise to over $4 per million British Thermal Units (BTUs), a 71% increase over a year ago, according to Gas Investing News.

Producers had already started pulling back on production after being deterred by the low prices, such that inventory was falling and some were beginning to doubt if the competitive advantage of low prices would continue for much longer.

New supplies have slowed – the number of rigs drilling for natural gas stood at 418, down 36 percent from a year earlier, according to Baker Hughes, quoted in the article. As one would expect, those low prices have stimulated demand from a number of industries.

Natural gas has begun to replace coal as a power source for electricity production and oil as a feeder stock for petrochemicals. Even hedge funds and other speculative investors have begun to buy long positions at what was rightly perceived as a low point in the price curve.

The cost advantage to the whole US economy is considerable, but for some consumers it is a global game changer. Some companies in Europe are paying US$ 8.50 per thousand cubic feet while the same gas is selling in Alberta for US$ 2.50.

Arguably, the most emotive threat to continued low gas prices comes from exports of LNG, where the profits of a few companies will be perceived as replacing the wider benefit to the US economy.

One such example is Britain’s Centrica (formerly state-owned and then privatized British Gas), which has just concluded a US$15 billion deal to take US LNG and export it to overseas markets (it should be said the license is pending, but the company is confident it will be granted).

The deal, outlined in the Telegraph, was touted as securing natural gas supplies for British consumers, but in reality Centrica is free to sell the gas anywhere and will probably ship it to Asian markets unless its UK customers are willing to pay a higher price.

The deal for Centrica to buy liquefied natural gas from Cheniere Energy’s facility in Louisiana will start in 2018 and run for 20 years.

Cheniere has four approved liquefaction trains under construction and the Centrica supply is said to be coming from a fifth train for which approval has been sought. The firm has also sold 2 million tons of supply to France’s Total energy group. The deal is said to be based on the price of natural gas at the Henry Hub delivery point in Louisiana plus a 15% premium to cover liquefaction and delivery for shipment.

Where From Here?

Expect the arguments to rise, along with the price.

Consumers are already making investments in the belief that prices will remain low, placing faith in the stickiness of natural gas price close to its source, but a combination of those same prices stimulating demand and exports will force prices to rise – and with them, those seeking political influence to stem the loss of supplies abroad.